The following is an essay I wrote for the Charles G Koch Summer Fellow Program.
Public Policy Essay *
Write a 500-word essay on a major issue of public policy. Your essay should address the significance of your chosen issue, the problems with the current policies, and your public policy approach to dealing with it. Please adhere to the word limit.
Reforming America’s health insurance system – and protecting it from the wrong sort of reforms – is critical for the preservation of our welfare and freedom. The modern health care apparatus is a crowning achievement of our era and has played a central role in our historically unparalleled standard of living. Today, health expenditures compose as much as 17% of US GDP. But this strength rests on an unsteady foundation.
The health care industry suffers from man-made maladies –government-induced incentives and regulations have warped the market and prohibited it from delivering its desired equilibrium. Employer-provided health care benefits are excluded from income tax liability, a subsidy that has atrophied the individual health insurance market. This system restricts Americans to the narrow set of options chosen by their employer – prohibiting many from selecting plans that truly match their preferences. Because so many purchase their insurance through employers, employees who are laid off simultaneously lose health insurance – compounding the miseries of the most desperate Americans.
At the same time, the states have slowly ratcheted down the number of options available to consumers. Insurers are required to include increasing number of procedures in their plans, even for those individuals who do not wish to buy them. Limits on deductibles and co-pays have been widely adopted in a misguided effort to “protect” consumers. “Community rating” rules force the young and healthy to subsidize the old and sick through redistributive premium prices. These regulations ensure that most do not get what they want, many pay more than they have to, and some simply decide that they would be better off without insurance.
A few simple reforms could remedy these problems. Individual states, or the federal government through its interstate commerce power, could permit Americans to buy insurance policies licensed under any states’ regulatory regime. This would free Americans from the specific requirements of their state of residence; the states would be forced to compete to deliver a “market equilibrium” bundle of regulations that best fit the needs of consumers and insurers.
The federal government could spur competition in the individual health insurance market by extending income tax exclusion to individual health policies. If Americans were allowed to use pre-tax health savings accounts to pay insurance premiums, they would no longer pay a tax penalty on insurance plans purchased outside their employer’s offerings.
Other proposals seek to “fix” health insurance through tighter government controls. These reforms aim at turning the risk-insurance market into something resembling a privatized welfare system in which all must participate. These reforms purport to “reduce costs”, but they can do so only by arbitrarily prohibiting Americans from seeking certain types of medical attention. Invidiously, those who would bear the redistributive costs of care would be rewarded for their “charity” with the loss of their freedom to make insurance decisions. In the long run, this rationing would reduce rewards to innovation, slowing the technological progress that has made health care so powerful today. We must not institute reforms of this nature.
This piece was originally posted on Americans for Tax Reform’s blog where I am an associate (intern).
A “public option” health insurer would create a new government sponsored enterprise in our health care market. Government enterprises are not merely inefficient – they are the harbringer of private competition’s slow death by regulation. Previously, we noted how the government has jealously legislated an anti-competitive zone around the US Postal Service. But there is an equally compelling example of government’s inability to tolerate competition in the health care market itself: Medicare.
In a Cato Policy Analysis publication, Kent Brown explains how Congress and the Medicare bureaucracy have systematically limited seniors’ choices to purchase health care outside of the Medicare bureaucracy. Through a combination of penalties for seniors who opt-out, regulations on providers, and subsidies, the government has driven private competition out of the senior health insurance market.
For most seniors, enrolling in Medicare need not be a conscious choice. Congress automatically enrolls most eligible seniors in the program. In order to opt out of Medicare Part A (hospital insurance), a senior must give up all Social Security benefits – an extremely painful option for low or middle income individuals who have been forced to pay payroll taxes for their entire working lives. Medicare Part B (outpatient care) is subsidized by general tax funds. Most seniors pay only 25% of their Medicare Part B premium. For every year that eligible seniors opt out of the program, their premiums increase cumulatively by 10%.
Between automatic enrollment, the loss of Social Security funds for opting out of Part A, punitive premium increases for opting out of Part B, and the artificially low cost of enrollment, choosing not to enroll in Medicare has become such an unrealistic option that, by 1997, private insurers had completely left the senior health insurance market. Only seniors rich enough to pay their own unexpected health care fees can afford to seek health care outside of Medicare.
Once seniors have enrolled in Medicare, they essentially lose the option to pay for their own health care. This is accomplished by a rule against “private contracting” for Medicare-covered services. This rule prohibits physicians from accepting private reimbursement for procedures that would be covered under Medicare. If a physician wishes to receive private reimbursement for these services, he must agree not to participate in Medicare for a period of two years. Because nearly all seniors have been herded into the program, opting out entirely would cripple most providers’ practices. Medicare ensures that providers will not find this alternative profitable by fixing rates for coverage of its beneficiaries.
Medicare has bullied away competition at both the insurer and provider level. The government’s freedom from competition has allowed it to act as an arbitrary monopoly. The result is predictable. Medicare operates inefficiently and unresponsively. Brown points to studies showing that nearly 30% of its provided care yields no health benefits. Medicare does not bother to provide true catastrophic coverage; as Sue Blevins has noted, Medicare does not cover the expenses of hospital visits after they exceed 150 days. Medicare also carefully regulates the legal amount of care that patients can purchase from even those providers who have opted out of the system – subjecting them to a government rationing scheme without alternatives.
These failings are not incidental to Medicare. They are predictable results of government entrance into the market. Because government enterprises rely on subsidies to provide “cheap” goods, people over-consume their products. Only by arbitrarily limiting the services it produces can Medicare control its costs. But if it allows competitors to remain in the market, consumers will notice the arbitrariness of these rationing decisions. Since only private, unsubsidized competitors will offer the rationed-away services, consumers will realize that the government inherently does not give them “what they want”. Killing private competition is the government’s way of covering up its own inevitable arbitrariness.
The public option can be no different from every other government venture. Because it has no stake in success and a government guarantee against failure, it will be run inefficiently. Subsidies will be necessary to ensure its health. And if these subsidies do not drive away its competitors outright, the public option will still have the same incentives for undercutting the private market as Medicare and the Postal Service: the private sector makes them look bad.
If you dislike the service and selection provided at your local Borders book store, you can use another merchant. You can go to Barnes and Noble, or a small independent book-seller, or buy from Amazon. If you don’t like the cheeseburgers at McDonald’s, you can go to Five Guys for lunch instead. If your apartment is lousy, you can search around for a new one. If you don’t like your doctor, you can get referred to a different one. If you don’t like your employer, you can switch jobs. If you don’t like your friends, you can hang out with other people. If you don’t like your girlfriend, you can break up with her.
But if you don’t like your current government, you have to find a new country and a new bookstore, burger place, apartment, doctor, job, friends, girlfriend, and more. You may have to learn a new language, and you will have to make expensive travel arrangements and pay shipping costs for whatever possessions you want to bring along.
This is the monopoly power of government. There are high costs to shifting the system of laws under which we live, costs that allow our government to charge us far more for the security it provides than the cost of providing it. These costs are exacerbated by our uncertainty, risk aversion, and limited individual knowledge of our alternatives. The “shareholders” of government – some members of the controlling majority – may benefit from the profit created by this monopoly power. Or they may not, if multiple overlapping majorities simultaneously extract different “profits” from different groups. But as a whole, society always suffers. Economists would say that there is a “dead-weight loss”.
From this monopoly point of view, the efficient government is one that is not able to price above its cost. This might be achieved by states so small that people could hop between them without having to change the other circumstances of their lives. Or it might be fostered by radical decreases in transportation costs. If a man could live in London and work in New York without suffering any travel costs (time or money), both countries would have less leverage over him.
It is hard to predict what types of laws and regulations would be adopted by the competitive state. But one thing seems clear. The redistributive burden thrown on the most productive citizens of a state represents no competitive pricing of the services it provides them. It is a monopolistic extraction of profit and odious to any person who would have a state treat its citizens equally.
This piece was originally posted on Americans for Tax Reform’s blog, where I am an Associate (intern).
“If you think about it, UPS and FedEx are doing just fine, right? No, they are. It’s the Post Office that’s always having problems.”
– President Obama, 8/11/09
Obama is right – the post office isn’t doing so well. Recently, Postmaster General John Potter requested that Congress end Saturday mail delivery in order to cut costs. As a rule, government sponsored enterprises (GSEs) fail to operate efficiently. GSEs exist to fill political, rather than market, demands, and they may not offer a product at a price that anyone is really willing to pay. Because politicians will ensure that organizations like the post office continue to function, its directors have limited incentives to cut unnecessary costs or operate at a profit.
So what will happen when the public option realizes, like the post office, that it cannot, metaphorically speaking, pay for health care “every day of the week”? It could imitate the post office and simply shut down on Sunday and perhaps Saturday as well. No consumers would sign up for insurance that only offered a 6/7 chance of providing coverage.
But a plan so bad that no one would purchase it fails to satisfy the arbitrary political demand for substantial government interference in the market. A government determined to have a “viable” public alternative to the private market is left with a few options once their offering fails on its own merits. They can subsidize it openly and have taxpayers pay for “weekend health care”. They can subsidize it implicitly by outsourcing administrative functions to other branches of the government (as the government outsources Medicare funds collection to the IRS). Or it can tilt the market in the public option’s favor by granting it special tax status and immunity from certain types of regulations and by passing laws that require the private market to adopt the public offering’s more expensive methodology.
Or it can do all of the above. As Edward Hudgins explains, the post office is a vivid example of government interference in defense of its sponsored firm. Congress has favored the post office with direct subsidies, tax privileges, and bans against “first-class mail” delivery in inter- and intra-city markets. Despite this generous patronage, the US Postal Service is $6 billion in debt.
Government offerings are a threat precisely because they respond to political, rather than market demand. Like the post office, they can only control costs by rationing. And like the post office, they can only ration after their competition has been regulated away. The government can cut health care on Saturday only after it has cut the rest of the private market. The twin arbitrary political demands of a public option ensure that we will be left with one meager, inefficiently delivered option. Why cater to politicians’ demands instead of actual consumer preferences?
Photo Credit: Davonteee
And probably not a co-op.
Note: this post was originally written for Americans for Tax Reform. It has been posted here in advance and may be serialized later to the ATR blog.
The White House has started to hint that the public option may no longer be a required feature of health care reform. Yesterday, Obama’s Health and Human Services Secretary Kathleen Sebelius suggested that a “co-op” might be an acceptable alternative to a government run public plan. But what, exactly, is a co-op? And would a government run co-op be substantially different from the public option supported by most Democrats?
In general, a co-op is a company owned by its customers, or members. The members or owners of an insurance co-op would be its policy holders. Co-op advocates claim, somewhat speciously, that co-ops deliver superior care because policy holders will be co-owners of their policy (alongside the tens of thousands of other co-op members).
If co-ops are more efficient in delivering health care, why don’t they exist? They do, after a fashion. Michael Tanner of the Cato Foundation notes that successful insurers regarded as co-ops such as Seattle’s Group Health Cooperative, California’s PacAdvantage, and Minneapolis’s Health Partners, Inc. have existed for some time. Tanner concludes:
By all accounts the people insured through these co-ops are happy with their choice. But there is no evidence that they are significantly less expensive or more efficient than other insurers.
Why are Democrats excited about a co-op if its slightly different corporate organization yields an identical product? For one thing, they aren’t actually proposing a co-op. They’re offering a public plan and just calling it a co-op.
In particular, Senator Chuck Schumer, one of the key Finance Committee negotiators, has proposed a co-op that would be subsidized by a $10 billion start up fund and controlled by presidential appointees. Schumer has made it clear that he wants a government-run national alternative to the private market.
If a “co-op” is controlled by presidential appointees, it’s unclear in what sense it would actually be a co-op. It would be meaningless to claim that an insurance option was owned by its policy holders if it were in fact controlled by the government. Importantly, HHS Secretary Sebelius seems to have been endorsing Schumer’s version of the co-op, and not the more moderate version being discussed by others like Senator Kent Conrad. Co-ops are ok, she explained, as long as they are not private insurance companies (i.e. they are public government insurance companies):
That’s really the essential part, is you don’t turn over the whole new marketplace to private insurance companies and trust them to do the right thing. We need some choices, we need some competition.
A government controlled, subsidized, “co-op” national insurance option is not an alternative to the public plan – it is the public option. Despite rhetoric to the contrary, it would be a rigid, bureaucratic entity. The massive $10 billion subsidy would tilt the market in the co-op’s favor. Congress and the President would be invested in its success because of the politically appointed directorship. This makes further subsidies, perhaps glossed as temporary start-up funds, likely or inevitable.
As the Heritage Foundation has noted, the government sponsored enterprise (GSE) model has a long and dismal history. Smaller rural electricity cooperatives have remained subsidized for nearly 80 years. The larger GSEs Fannie Mae and Freddie Mac were able to drive many competitors from the housing finance market because they had the implicit backing of the Federal government. This guarantee became explicit when the government bailed out the failing firms after the housing market collapse – at a cost that may exceed $100 billion. Even if a government sponsored co-op were not explicitly subsidized past its start-up costs, it would still receive the same implicit subsidies that covered Fannie and Freddie.
Absent the direct government controls envisioned by Schumer and, apparently, Sebelius, explicit and implicit subsidies would still be a risk for any government-sponsored national “alternative” to the private market. The more moderate co-op proposals advanced by Senator Conrad and others on the Finance Committee suffer from these fatal flaws.
Heritage has laid out conditions under which co-ops could be created – if co-ops, and not a public government-run option were what Congress really wanted. As usual, increased health care choice requires less and not more government interference. Government cannot create options for consumers; it can only choose whether or not it wants to limit them. This reality may be upsetting to Schumer, Sebelius, et al. who undoubtedly want to be able to make something new for Americans. If the frustration grows unbearable, they can always look for a job in the private sector.
I just finished reading Brideshead Revisited. The novel gives a good sketch of my grievances with religion. Religion drives apart family, friends, and lovers, without hint of preventing or punishing the evils – adultery, alcoholism, homosexuality, divorce – it supposedly condemns. It destroys the happiness of believers and unbelievers alike – and then celebrates their self-inflicted suffering.
Brideshead Revisited is a ringing indictment of religion. Or so I thought, and perhaps I merely reveal my cynical lack of religion. It turns out that the author, Evelyn Waugh, was a committed Catholic and intended the book to be a celebration of “the operation of Grace”. I wonder, can a religious person read Brideshead and really celebrate the “Grace” of a god content to tend his flock through the destruction of his follower’s lives? It appalls to think that a Catholic could be excited to watch Sebastian, in the final stages of delirious alcoholism, crawl into the embrace of another comforting narcotic – monastic orders. Or that they would be relieved, and not heartbroken, to see Julia and Charles part, childless, loveless, and alone for the rest of their lives. Or that they would cheer the priest as he attempts repeatedly, against the advice of the doctor, to deliver the last rights to an apparently unwilling and apostate Lord Marchmain.
Religion, in its own portrayal, is the enemy of life in this world. It is so not by accident, but by necessity. It could have no power over us if it did not claim the irrelevance of happiness in the material world. It must hold that the deepest misery and tragedy here is merely a backdrop against its own imperceptible supreme good. It must hold that good and bad are something unknowable (yet taught) rather than instinctively known. To be religious is to read Brideshead Revisited as a sweet story of redemption, rather than what is so plainly is – a tragedy.
So far as I am concerned, I can see no hopes whatever for [MPS] to become a useful force in the fight for freedom… the philosophies range all the way from middle-of-the-roaders to one who is an out-and-out socialist.
This was, I believe, in 1949, after the first Mont Pelerin Society meeting. The Mont Pelerin Society was intended to be a classically liberal organization. It vaguely describes its own mission statement accordingly:
Its sole objective was to facilitate an exchange of ideas between like-minded scholars in the hope of strengthening the principles and practice of a free society and to study the workings, virtues, and defects of market-oriented economic systems.
Given the organization’s purpose, it is unlikely that any of the original MPS attendees were “socialist” in the sense that they supported complete government control of the means of production for the purpose of equalization of income. More likely they merely supported, as Mises complained, government controlled redistribution and Hayekian programs to guarantee a “minimum standard of living”.
If so, this is more anecdotal evidence for what I assert is a more commonly used alternative definition of “socialism” – generally, programs of mandatory redistribution run by the government.